With the US stock
markets challenging a major multi-year high, investors are feeling
pretty complacent these days. But unseen below the placid surface,
a serious risk is arising from the depths. With each passing day,
the odds grow that a new stock bear is imminent. As these merciless
beasts typically maul the markets until stock prices are cut in
half, they are dangerous threats that cannot be taken lightly.

The stock markets
perpetually march forwards in great bull-bear cycles. All bull
markets eventually mature and top when greed and complacency grow
excessive and everyone willing to buy has already bought. Then bear
markets are born, which donít run their course until fear reigns and
everyone susceptible to being scared into selling has already sold.
And then this endless cycle begins anew, bull bear bull bear.

The problem today
is our current bull market is long in the tooth, running longer and
higher than average. And the older any trend in the markets gets,
the greater the odds of an impending major reversal. After a bull
market, a bear is absolutely inevitable. The only question is when
it will awaken from hibernation. And thanks to our position in the
bull-bear cycles today, probabilities favor that tipping point being
soon.

Understanding
these bull-bear cycles is crucial for investors and speculators. If
you wrongly buy near the top of a bull, or sell near the bottom of a
bear, it will derail your wealth-building progress for years.
There are two distinct species of bulls and bears, secular and
cyclical. The secular ones persist for the better part of two
decades, while the shorter cyclical ones alternate every few years
within the secular ones.

A full secular
bull-bear cycle lasts a third of a century, or about 17 years
each for the bull phase and bear phase. To get up to speed on this
essential strategic context, read one of my essays on
Long Valuation
Waves. Our current full secular-bull-bear cycle began way back
in August 1982, but the second secular-bear half started in March
2000. We are now 12 years into this phase, which again is likely to
last 17 years.

There is a
widespread misconception that secular bears drive stock prices lower
like shorter cyclical bears, but this isnít true. A secular bear is
a giant sideways grind, a nearly-multi-decade consolidation.
Stock prices are driven way too high relative to underlying
corporate earnings power in secular bulls, so in secular bears they
simply drift sideways long enough for earnings to catch up with
stock prices.

Within these
mighty sideways-grinding secular bears, there are shorter cyclical
bears and bulls. The bears tend to cut general stock prices in
half over a couple years, while the bulls tend to double
them again over the next few. The net effect is a gigantic trading
range running from the preceding secular-bull highs to halfway below
them. High in its range now, todayís cyclical bull is running out
of room to run.

All this
secular-cyclical stuff is a lot easier to comprehend when seen
visually. This first chart compares the last two secular bears,
todayís that started in early 2000 (blue) and the previous one
before that running from 1966 to 1982 (red). Both of these secular
sideways grinds were formed by a series of oscillating cyclical
bears and bulls. And todayís cyclical bull is likely nearing the
end of its road.

After the secular
bull of the 1980s and 1990s topped in early 2000, the first cyclical
bear of this secular bear cut the stock markets in half. The
flagship S&P 500 stock index fell 49.1% over 2.6 years. But out of
that fear and despair a new cyclical bull was born, which propelled
the SPX 101.5% higher over 5.0 years. That was followed by a
cyclical bear which climaxed after 2008ís stock panic, a 56.8% drop
over 1.4 years.

And out of those
secondary lows after that
once-in-a-lifetime fear superstorm, todayís cyclical bull was
born. By its latest interim high in early April 2012, it had
powered 109.7% higher over 3.1 years. Note above that these
alternating cyclical bears and bulls within the greater secular bear
have indeed formed a giant trading range. It runs between roughly
1500 on the upside to half that on the low end, 750.

Todayís cyclical
bull is nearing that secular resistance. The higher the SPX travels
within this trading range, the greater the odds its cyclical bull is
due to fail and roll over into the next cyclical bear. While weíre
not at 1500 yet, realize mid-secular-bear cyclical bulls certainly
donít have to hit resistance before giving up their ghosts. Back in
the 1970s secular bear, cyclical bears often began well under
resistance.

Towards the end of
our last cyclical bull that climaxed in October 2007, the SPX
remained above 1400 for over a year. So why start fearing a new
cyclical bear now since we are just starting to peek over 1400
again? Remember that 2007 was a wildly-different environment from
2012. The US housing market, China, and commodities were booming.
Meanwhile the European debt crisis and Washingtonís inability to
make any progress whatsoever hadnít yet begun.

The general market
psychology today, with our many structural worries and intense
anxiety, is far more conducive to birthing a bear than the halcyon
pre-panic days of 2007. Unless a political miracle happens, Obamaís
smothering regulations and staggering debt growth are somehow
magically unwound quickly, it is hard to imagine todayís
cyclical bull enjoying a 2007-style long drawn-out encore topping.

While the SPXís
high position in its giant secular trading range is important, it
isnít the primary reason why a new cyclical bear is increasingly
likely. That honor falls to another perspective on these bull-bear
cycles, how long they tend to last and how big they tend to grow.
While the first chart had zeroed axes to highlight how cyclical
bears cut prices in half, this second one zooms in to examine what
births these fearsome beasts.

The last secular
bear running 16.5 years between 1966 and 1982 enjoyed four cyclical
bulls, while todayís 12-year-old secular bear starting in 2000 has
seen two so far. Since we are trying to game when todayís is likely
to fail, it is best to exclude it from the averages. Before it in
the entire modern history of cyclical bulls within secular bears,
their average duration is 34.8 months. And this is even skewed
high.

Thanks to that
housing bubble in 2007 and the massive economic impact of the Fedís
inflation and cash-out refinancings, the previous cyclical bull
lasted much longer than they generally do (60 months). If you just
include the 1970s cyclical bulls, the average drops dramatically to
28.5 months. The general rule of thumb for the lifespan of a
cyclical bull within a secular bear is a few years. Todayís
cyclical bull is beyond all of these.

It was born in
March 2009 at the secondary panic lows, which made it 36.8 months
old at its latest high in early April 2012. But as of this week,
the SPX was within spitting distance of edging up to even better
levels. If we see a new high soon, this cyclical bull is already
41.0 months old today. Thus this bull is long in the tooth, well
past mature by any mid-secular-bear cyclical-bull-lifespan metric
you want to use.

But even that may
be conservative. Remember that the last cyclical bear climaxed in
2008ís stock panic. Such epic fear maelstroms are so exceedingly
brutal that secondary lows are unheard of. Yet we had two
secondary lows after that panicís initial lows. They were both
driven by political fears, by the rise of a man who won the
US Presidency on a scary platform of Marxism (class warfare) and
Socialism (theft via taxation).

In a single
month in the heart of the stock panic, the SPX had plummeted
30.0% by late October 2008! A third of Americansí vast stock wealth
had vaporized in weeks. And that should have been the ultimate low,
the climax of both the stock panic and cyclical bear that spawned
it. Indeed over the next 6 trading days, the SPX blasted 18.5%
higher. All throughout history, a singular decisive low like this
ended every panic.

But the day that
post-panic bounce reached its peak was Election Day. And after the
results came in that night and investors learned Americans had
inexplicably chosen to elect a Marxist and Socialist, the markets
tanked. Investors were terrified of Obamaís campaign threats of
higher taxes, crushing regulations, ballooning big government, and
job-destroying class-warfare rhetoric. So the SPX plummeted 25.2%
over the next 12 trading days immediately after Obama won!

That too should
have been the ultimate panic low, 11.4% below the initial one
several weeks earlier. And that November 2008 low was when fear
peaked, the VXO fear gauge hitting a staggering 87.2 on close
compared to 86.0 at the October low. But there was one more
secondary low, much later in March 2009. That was a political
anomaly as well. Obama certainly didnít shift to the middle after
winning like many on Wall Street somehow expected.

Right after his
Administration took office in late January 2009, the toxic
class-warfare rhetoric exploded. Obama railed against investors,
saying our already-high taxes were far too low. He wanted the
biggest tax hike on investors in the history of this nation, and
socialized medicine, and endless new regulations. So the stock
markets slumped in despair into early March 2009. The SPX fell
another 10.1% under Novemberís secondary low.

But it is fear
that marks the climaxes of stock panics and cyclical bears, and the
VXO fear gauge merely hit 51.5 at that March 2009 low (54.0 a couple
trading days earlier). This was a far cry from the unprecedented
high-80s reads seen during the stock panic! So there is a
strong academic case to be made that the true stock-market bottom
should have been October 2008ís, the original decisive fear climax
before Obamaís awful anti-American politics hammered the markets
further.

So it is entirely
reasonable to consider October 2008 the end of the previous cyclical
bear instead of March 2009. This rendering makes the current
cyclical bull 41.2 months old at its recent April 2012 peak and 45.4
months old today. Once again this is well beyond the average
lifespan of the rest of the mid-secular-bear cyclical bulls of
modern times (34.8 months). Todayís bull has already enjoyed a long
and full life.

And boy, has it
been fruitful too! Remember that cyclical bulls tend to double
stock prices back up to the preceding secular bullís highs. This
isnít as readily apparent in the 1970s secular bear above because I
used SPX data for comparability, and this index wasnít prominent
back then. But if you look at the main stock index of the time, the
classic Dow 30,
the cyclical bulls were closer to doublings back then too.

In todayís secular
bear, the last cyclical bull climaxing in October 2007 ran 101.5%
higher, a perfect doubling. Meanwhile todayís cyclical bull had
already climbed a whopping 109.7% higher by its early-April high!
It is already the biggest mid-secular-bear cyclical bull in modern
history, and could get even bigger if the SPX edges to marginal new
bull highs soon. A cyclical bull this big is unprecedented.

The stock panic
explains much of this outsized gain, since the extreme secondary
lows driven by Obamaís scary politics pushed the SPX below its 750
secular support. Provocatively at the November 2008 panic low just
after the elections, the SPX bounced at 752 right on this line. The
lower the starting point for a cyclical bull, the easier it is to
get outsized gains. I even predicted a
bigger-than-average cyclical bull just months after the panic.

But this still
doesnít change the fact that the recent yearsí cyclical bull is
considerably bigger than anything else seen in modern times. The
longer a cyclical bull powers higher, and the greater its gains
grow, the higher the odds it is due to roll over. At some point
greed and complacency peak, all available buyers have already bought
which leaves only sellers. And then the bull gives up its ghost to
yield to the subsequent bear.

Could this
analysis be all wrong? Could the 2000s secular bear finally be
over? Highly unlikely. The
Long Valuation
Waves that encompass full secular bulls and bears are remarkably
consistent in their third-of-a-century duration, as are secular
bears which run for the second halves of these waves. The previous
two secular bears ran 16.5 years (1960s) and 19.8 years (1930s).
Todayís is only 12.4 years old.

So the averages
suggest we have the better part of five years left, and even in a
best-case scenario there should be a few more. I suspect that one
more cyclical bear will take us back down near secular support (750
SPX) over the next couple years or so. And then the subsequent
cyclical bull will once again eventually regain resistance (1500)
over the following three years. And then this secular bear
will end.

Also realize that
the primary reason secular bears exist is valuations.
Valuations, or how high stock prices trade relative to the
underlying earnings their companies can generate, are propelled to
unsustainable bubble extremes late in secular bulls. The mighty
companies of the SPX were trading at an astounding 43.8x earnings
back in early 2000 when todayís secular bear was stealthily born!

Secular bears
typically donít end until the general-market price-to-earnings ratio
falls back down near 7x earnings, half the historical average of
14x. The 1970s secular bear didnít end until the SPX was trading at
6.6x, way after it started at roughly the same SPX level 16 years
earlier but then priced at 24.1x. If the SPXís P/E ratio was down
under 10x today, then we could consider the possibility of this
secular bear ending early.

But itís been
nowhere close. Near the SPXís latest cyclical-bull high in early
April, the elite component stocks of this flagship index were
collectively trading at 19.4x earnings. There is no way a
secular bear, which exists to force stocks sideways from extreme
overvaluation to extreme undervaluation, would end on such a high
metric. This bearís valuation work is only about half done so far,
with lots of drifting left to go.

And not even that
crazy stock panic or the Obama scares afterwards pushed the SPX to
secular-bear-ending territory. Its P/E ratio was still 11.6x
heading into the March 2009 secondary low, and was 13.0x at the end
of October 2008. Secular bears are a valuation thing, and
valuations have never been anywhere close to levels that could send
this decade-plus bear back into hibernation early.

In light of all
this, the risk that a new cyclical stock bear will soon be upon us
is high and growing. This has enormous implications for investors
on multiple fronts. If you want to plow new surplus capital into
stocks, late in a cyclical bull is the wrong time to do it. After
the subsequent cyclical bear cuts the markets in half again, the
same cash will buy twice as many shares at very cheap prices. Donít
buy high late in a bull.

If you are going
to need to sell significant stock positions to raise cash anytime in
the next five years or so, it is prudent to do it soon while the SPX
is still high in its secular trading range. I say five years
because a cyclical bear can run for two and then a cyclical bull for
another three before we get back up near resistance again. As an
added bonus, capital-gains tax rates remain low for the rest of
2012.

Provocatively not
every sector gets sucked into cyclical bears, there are isolated
areas that thrive when the rest of the markets are selling off.
Chief among them is gold, and therefore its leveraged
subsidiary plays of silver and the precious-metals miners. In the
last cyclical bear when the SPX lost 56.8%, gold rallied 24.8% over
that exact span! In the one before that when the SPX lost 49.1%,
gold climbed 12.6% even though its secular bull didnít start until
the middle.

So at Zeal, weíve
been exiting our general commodities-stock positions that leverage
stock-market downside and migrating back into elite precious-metals
stocks which leverage goldís upside. Even if the stock bear somehow
tarries, the setup in
gold and
silver today
for massive autumn rallies is amazing. With the stock-bear
risk high and growing, the oversold and unloved precious metals are
a fantastic contrarian play.

To stay abreast of
these crazy markets and the risks and opportunities they present, we
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The bottom line is
the stock marketsí cyclical bull of recent years is getting long in
the tooth. It has both lasted longer than the average
mid-secular-bear cyclical bull and powered considerably higher.
Greed and especially complacency run high, with the flagship S&P 500
stock index nearing the top of its giant secular-bear trading
range. All of this is increasing the odds a new cyclical bear will
be born anytime now.

These dangerous
beasts are not to be trifled with, as they tend to cut the stock
markets in half. The losses in popular high-beta sectors are even
greater. The surest defense is boring old cash, as falling stock
prices greatly increase its purchasing power. But a
far-more-profitable and exciting alternative is gold, which has
continued rallying through each previous cyclical bear of this long
secular bear.